Reputation Versus Legitimacy: A Temporal Perspective of Environmental, Social, and Governance Effects on Financial Performance in the Hospitality Industry

Past research often merges environmental (E), social (S), and governance (G) factors into a single metric and presents mixed findings. Drawing on literature of reputation building and legitimacy theory , this study examines the independent effects of E, S, and G ratings on hospitality firms’ current operating performance and market valuation of future profitability. Deploying a mixed-method approach, this study unpacks the E, S, and G effects by analysing Bloomberg Environmental, Social, and Governance (ESG) data and a survey from a panel of expert institutional investors. Our analysis of Bloomberg ESG data reveals that E and S ratings align with reputation-building processes, demonstrating positive correlations with both current operating performance and market valuation of future profitability. In contrast, G ratings align with legitimacy theory, exhibiting a positive correlation with current operating performance but a negative correlation with market valuation of future profitability. The results from the study with institutional investors further support the proposed linkages with legitimacy and reputation building. Overall, these findings highlight the importance of a detailed ESG evaluation approach, revealing the unique ways each ESG component affects the financial performance of hospitality firms.